Wednesday, October 30, 2019
Sunday, October 27, 2019
Restaurants and Workouts with Creditors
Restaurants and Workouts with Creditors
Many readers of our blog, who read last week's post titled
“Restaurant Closings in New York City and Bankruptcy”
have asked us to do a post regarding workouts with creditors
after the restaurant has closed.
Let's review a typical fact pattern, that we see regarding failed restaurants.
The restaurant is owned by an LLC or a subchapter S corporation and the member’s
interest in the LLC or the stock in the S corporation are 100% owned by Mr. X.
The restaurant closes and the following debts are due and owing:
Suppliers or trade vendors are owed $150,000
The landlord is owed $75,000, which amount is subject to a “guaranty” or a “good guy guaranty” by Mr. X.
$45,000 is owed for New York State sales tax.
The FICA/Futa tax penalty for the employee component (trust fund money) is $30,000 and
Former employees of the restaurant are owed $20,000 im past due wages.
For purposes of this example the restaurant has elected to close and not
file for Chapter 7 or Chapter 11 bankruptcy.
What should the restaurant owner (Mr X) do? Let’s analyze how each debt
and how it should be treated.
First, with respect to the suppliers or trade vendors, if those debts have not been guaranteed
by Mr X. they do not have to be paid because they are the obligation of the restaurant.
If the suppliers or vendors are not paid within 30 to 45 days of the restaurants closing,
they can sue the restaurant and they will be able to obtain a judgment against the restaurant,
but not against Mr. X.
Second, the debt to the landlord is an obligation of the restaurant and of the guarantor, Mr X. If the landlord is not paid,
the Landlord will sue the restaurant and Mr X. Since the restaurant is closed, it does not need to be concerned about a
judgment from the Landlord, but the judgment against Mr. X would need to be addressed thru a workout with the landlord
or by a bankruptcy filing by Mr. X. The debt to the former Landlord should be addressed by Mr. X after the payment or a
workout with New York State sales tax and the FICA/FUTA tax penalty, for reasons discussed below.
Third, the $45,000 owed to New York State sales tax is a trust fund or a responsible person tax and it would not
be dischargeable in a bankruptcy by Mr. X and an arrangement should be made to pay that tax through the sale
of the restaurants furniture fixture & equipment or the collection of its accounts receivable, or from Mr. X’s savings.
Fourth, the FICA/FUTA $30,000 tax is a trust fund and similar to sales tax it would not be dischargeable
in Mr. X’s bankruptcy filing and it should be paid or payment arrangements should be made with the IRS
Fifth, under New York State law past due wages due to former employees are an obligation of the restaurant and
Mr X personally. If these wages are not paid by Mr. X the former employees can sue him and obtain a judgment,
but the judgment will be dischargeable in a Chapter 7 bankruptcy filing by Mr. X.
With respect to the terms of a workout there are two ways to work out a payment plan with a creditor, one is
with a lump-sum payment and the other is a series of payments over time, otherwise known as an “installment agreement”
or an “out of court settlement or workout”.
A creditor will give a larger discount for a lump sum payment, than an installment payment. For example,
if a creditor is owed $30,000, Mr. X may be able to negotiate a lump sum payment of $5,000 as a final and full payment,
with a release from the creditor to Mr. X.
In an installment payment arrangement Mr. X would agree to pay a creditor who is due $30,000, $10,000 overtime,
in ten $1000 monthly installment payments.
Restaurant owners with a failed or a closed restaurant should consult with an experienced bankruptcy or in debtor-creditor attorney
as soon as possible in the process. Jim Shenwick, Esq. can be contacted at 212-541-6224 or at jshenwick@gmail.com
Many readers of our blog, who read last week's post titled
“Restaurant Closings in New York City and Bankruptcy”
have asked us to do a post regarding workouts with creditors
after the restaurant has closed.
Let's review a typical fact pattern, that we see regarding failed restaurants.
The restaurant is owned by an LLC or a subchapter S corporation and the member’s
interest in the LLC or the stock in the S corporation are 100% owned by Mr. X.
The restaurant closes and the following debts are due and owing:
Suppliers or trade vendors are owed $150,000
The landlord is owed $75,000, which amount is subject to a “guaranty” or a “good guy guaranty” by Mr. X.
$45,000 is owed for New York State sales tax.
The FICA/Futa tax penalty for the employee component (trust fund money) is $30,000 and
Former employees of the restaurant are owed $20,000 im past due wages.
For purposes of this example the restaurant has elected to close and not
file for Chapter 7 or Chapter 11 bankruptcy.
What should the restaurant owner (Mr X) do? Let’s analyze how each debt
and how it should be treated.
First, with respect to the suppliers or trade vendors, if those debts have not been guaranteed
by Mr X. they do not have to be paid because they are the obligation of the restaurant.
If the suppliers or vendors are not paid within 30 to 45 days of the restaurants closing,
they can sue the restaurant and they will be able to obtain a judgment against the restaurant,
but not against Mr. X.
Second, the debt to the landlord is an obligation of the restaurant and of the guarantor, Mr X. If the landlord is not paid,
the Landlord will sue the restaurant and Mr X. Since the restaurant is closed, it does not need to be concerned about a
judgment from the Landlord, but the judgment against Mr. X would need to be addressed thru a workout with the landlord
or by a bankruptcy filing by Mr. X. The debt to the former Landlord should be addressed by Mr. X after the payment or a
workout with New York State sales tax and the FICA/FUTA tax penalty, for reasons discussed below.
Third, the $45,000 owed to New York State sales tax is a trust fund or a responsible person tax and it would not
be dischargeable in a bankruptcy by Mr. X and an arrangement should be made to pay that tax through the sale
of the restaurants furniture fixture & equipment or the collection of its accounts receivable, or from Mr. X’s savings.
Fourth, the FICA/FUTA $30,000 tax is a trust fund and similar to sales tax it would not be dischargeable
in Mr. X’s bankruptcy filing and it should be paid or payment arrangements should be made with the IRS
Fifth, under New York State law past due wages due to former employees are an obligation of the restaurant and
Mr X personally. If these wages are not paid by Mr. X the former employees can sue him and obtain a judgment,
but the judgment will be dischargeable in a Chapter 7 bankruptcy filing by Mr. X.
With respect to the terms of a workout there are two ways to work out a payment plan with a creditor, one is
with a lump-sum payment and the other is a series of payments over time, otherwise known as an “installment agreement”
or an “out of court settlement or workout”.
A creditor will give a larger discount for a lump sum payment, than an installment payment. For example,
if a creditor is owed $30,000, Mr. X may be able to negotiate a lump sum payment of $5,000 as a final and full payment,
with a release from the creditor to Mr. X.
In an installment payment arrangement Mr. X would agree to pay a creditor who is due $30,000, $10,000 overtime,
in ten $1000 monthly installment payments.
Restaurant owners with a failed or a closed restaurant should consult with an experienced bankruptcy or in debtor-creditor attorney
as soon as possible in the process. Jim Shenwick, Esq. can be contacted at 212-541-6224 or at jshenwick@gmail.com
Saturday, October 19, 2019
Restaurant Closings in New York City and Bankruptcy
Restaurant Closings in New York City and Bankruptcy
As reported by many newspapers and websites, a significant
number of restaurants are closing in New York City. These
closings are due to the high cost of rent, insurance,
overhead and the increase in the minimum wage to $15 per
our for the restaurant staff. A restaurant consultant who
meet with me stated that a Ray Kroc associate told an
individual not to open a restaurant unless they were prepared
to clean the bathroom and wipe the floor themselves due to
the thin margins in many restaurants.
At Shenwick & Associates, we have seen a significant uptick in
bankruptcy filings by restaurant and restaurant owners and we have
developed a legal strategy to deal with these situations.
We focus on the financial issues related to the restaurant first
and then to the owner of the restaurant second. Most restaurants
are owned by LLC or Subchapter S corporations. We first review
the assets and liabilities for the restaurant and a recent budget
showing revenue and expenses for the year to date. We review that
information with the owner and determining whether the restaurant
should close or file for bankruptcy and we then focus on issues
related to the owner of the restaurant.
Restaurants are eligible to file for chapter 7 or chapter 11 bankruptcy.
Chapter 7 is a liquidation where the restaurant is closed or chapter 11 is a
reorganization where the business can attempt to reorganize its
debts. In the Southern and Eastern District of New York (Manhattan,
Brooklyn, Queens and Nassau county) historically on average only 1 out
of 10 businesses are able to successfully reorganize
(file and confirm a chapter 11 plan of reorganization). There are many reasons
for the low percentage of success, but many of those factors related to the
cost and expense of filing chapter 11 bankruptcy and the inability to obtain
financing and capital from third parties or banks.
The option that most restaurant owners face is either to close the restaurant
or file Chapter 7 bankruptcy for the LLC or S Corporation that owns the restaurant.
In Chapter 7 bankruptcy a bankruptcy trustee closes the restaurant and liquidates
any inventory, furniture fixture or equipment and attempts to collect accounts
receivable. The chapter 7 trustee then takes those monies, if any and distributes
them to creditors after paying legal fees and court costs.
It's the restaurant does not have significant amounts of furniture fixture or
equipment or accounts receivable, the owner may be better off closing the
restaurant itself and selling or auctioning off any furniture fixture and equipment
and attempting to collect its own accounts receivable. Additionally,
if the restaurant lease has a term of 3 years or more and is below market the
restaurant owner may be able to assign (sell) the lease to a 3rd party.
A Chapter 7 bankruptcy trustee is permitted to bring lawsuits to recover
monies that may have been paid to third parties (preference actions)
or recover money or property paid to a third party
(fraudulent conveyance actions) and the bankruptcy trustee will want to
review the books and records for the restaurant, its checking account
and tax returns. The owner of the restaurant
will have to go to one meeting at the courthouse (called the 341 hearing) and
cooperate with the bankruptcy trustee.
These factors often affect whether a restaurant will file for chapter 7
bankruptcy or just close.
Notwithstanding the fact that the restaurant is owned by an LLC or
Subchapter S corporation, members of the LLC, including the officers,
directors, shareholders or the individuals that signed
the checks may be liable for certain debts of the restaurant after it
closes (discussed below).
Some of those debts may be “responsible person taxes” which are trust fund
taxes such as sales tax or FICA/FUTA taxes withheld from an employee's wages
or the FICA/FUTA tax penalties.
Sales tax and FICA/FUTA taxes are not dischargeable in personal bankruptcy, so
those debts should be paid prior to the restaurant closing or paid from the sale
of furniture, fixtures and equipment, collection of accounts receivable or from the
sale of the lease.
Next, if a member of the LLC or a shareholder guaranteed a lease obligation, or
guaranteed debts to a supplier, they be personally liable ( discussed below).
There are 2 types of lease guaranties, good guy guaranties and lease guarantees
and the type of guaranty can affect the amount owed by the restaurant owner.
If a supplier to the restaurant is not paid, the restaurant is generally liable,
however in certain instances, the supplier will look for a “deeper pocket” and sue
the individual arguing “alter ego” or “piercing the corporate veil” and attempt to
sue not only the restaurant but the owner of the restaurant as well.
The owner of the restaurant, may also be liable personally for wages not paid to
the restaurant staff under the New York State Business Corporation law.
A restaurant owner with significant business debts may need to file a Chapter 7
bankruptcy or attempt an out-of-court workout with respect to the monies that it
owes.
To determine whether a restaurant owner should file bankruptcy or attempt to do an
out-of-court workout with its creditors, we need to see a list of assets or property
that the restaurant owner owns, a list of liabilities or money or property
owed to third parties and an after-tax monthly budget, showing what the restaurant
owner earns what it pays in personal and business expenses.
Unfortunately, in many instances after the restaurant is closed, the restaurant owner
needs to file a Chapter 7 or Chapter 13 personal bankruptcy and
James Shenwick is available to help address these issues.
Jim Shenwick 212 541 6224, jshenwick@gmail.com
As reported by many newspapers and websites, a significant
number of restaurants are closing in New York City. These
closings are due to the high cost of rent, insurance,
overhead and the increase in the minimum wage to $15 per
our for the restaurant staff. A restaurant consultant who
meet with me stated that a Ray Kroc associate told an
individual not to open a restaurant unless they were prepared
to clean the bathroom and wipe the floor themselves due to
the thin margins in many restaurants.
At Shenwick & Associates, we have seen a significant uptick in
bankruptcy filings by restaurant and restaurant owners and we have
developed a legal strategy to deal with these situations.
We focus on the financial issues related to the restaurant first
and then to the owner of the restaurant second. Most restaurants
are owned by LLC or Subchapter S corporations. We first review
the assets and liabilities for the restaurant and a recent budget
showing revenue and expenses for the year to date. We review that
information with the owner and determining whether the restaurant
should close or file for bankruptcy and we then focus on issues
related to the owner of the restaurant.
Restaurants are eligible to file for chapter 7 or chapter 11 bankruptcy.
Chapter 7 is a liquidation where the restaurant is closed or chapter 11 is a
reorganization where the business can attempt to reorganize its
debts. In the Southern and Eastern District of New York (Manhattan,
Brooklyn, Queens and Nassau county) historically on average only 1 out
of 10 businesses are able to successfully reorganize
(file and confirm a chapter 11 plan of reorganization). There are many reasons
for the low percentage of success, but many of those factors related to the
cost and expense of filing chapter 11 bankruptcy and the inability to obtain
financing and capital from third parties or banks.
The option that most restaurant owners face is either to close the restaurant
or file Chapter 7 bankruptcy for the LLC or S Corporation that owns the restaurant.
In Chapter 7 bankruptcy a bankruptcy trustee closes the restaurant and liquidates
any inventory, furniture fixture or equipment and attempts to collect accounts
receivable. The chapter 7 trustee then takes those monies, if any and distributes
them to creditors after paying legal fees and court costs.
It's the restaurant does not have significant amounts of furniture fixture or
equipment or accounts receivable, the owner may be better off closing the
restaurant itself and selling or auctioning off any furniture fixture and equipment
and attempting to collect its own accounts receivable. Additionally,
if the restaurant lease has a term of 3 years or more and is below market the
restaurant owner may be able to assign (sell) the lease to a 3rd party.
A Chapter 7 bankruptcy trustee is permitted to bring lawsuits to recover
monies that may have been paid to third parties (preference actions)
or recover money or property paid to a third party
(fraudulent conveyance actions) and the bankruptcy trustee will want to
review the books and records for the restaurant, its checking account
and tax returns. The owner of the restaurant
will have to go to one meeting at the courthouse (called the 341 hearing) and
cooperate with the bankruptcy trustee.
These factors often affect whether a restaurant will file for chapter 7
bankruptcy or just close.
Notwithstanding the fact that the restaurant is owned by an LLC or
Subchapter S corporation, members of the LLC, including the officers,
directors, shareholders or the individuals that signed
the checks may be liable for certain debts of the restaurant after it
closes (discussed below).
Some of those debts may be “responsible person taxes” which are trust fund
taxes such as sales tax or FICA/FUTA taxes withheld from an employee's wages
or the FICA/FUTA tax penalties.
Sales tax and FICA/FUTA taxes are not dischargeable in personal bankruptcy, so
those debts should be paid prior to the restaurant closing or paid from the sale
of furniture, fixtures and equipment, collection of accounts receivable or from the
sale of the lease.
Next, if a member of the LLC or a shareholder guaranteed a lease obligation, or
guaranteed debts to a supplier, they be personally liable ( discussed below).
There are 2 types of lease guaranties, good guy guaranties and lease guarantees
and the type of guaranty can affect the amount owed by the restaurant owner.
If a supplier to the restaurant is not paid, the restaurant is generally liable,
however in certain instances, the supplier will look for a “deeper pocket” and sue
the individual arguing “alter ego” or “piercing the corporate veil” and attempt to
sue not only the restaurant but the owner of the restaurant as well.
The owner of the restaurant, may also be liable personally for wages not paid to
the restaurant staff under the New York State Business Corporation law.
A restaurant owner with significant business debts may need to file a Chapter 7
bankruptcy or attempt an out-of-court workout with respect to the monies that it
owes.
To determine whether a restaurant owner should file bankruptcy or attempt to do an
out-of-court workout with its creditors, we need to see a list of assets or property
that the restaurant owner owns, a list of liabilities or money or property
owed to third parties and an after-tax monthly budget, showing what the restaurant
owner earns what it pays in personal and business expenses.
Unfortunately, in many instances after the restaurant is closed, the restaurant owner
needs to file a Chapter 7 or Chapter 13 personal bankruptcy and
James Shenwick is available to help address these issues.
Jim Shenwick 212 541 6224, jshenwick@gmail.com
Pensions and Chapter 7 Bankruptcy filings
With the increase in bankruptcy filings, many clients have contacted us regarding
the treatment of their pensions in a chapter 7 bankruptcy filing and whether they should borrow from their pension prior to filing for bankruptcy, if necessary.
Under the law, both Roth and traditional IRA’s are exempt up to $1,283,025 in a chapter 7 bankruptcy filing.
401(k)s, 403(b)s, profit sharing plans, SEP & Defined Benefit Plans are completely exempt in a chapter 7 bankruptcy.
Pension monies are also exempt from the reach of creditors (“spendthrift trust”) so they cannot be liened or levied by creditors. If those monies are withdrawn from a pension plan they are subject to the reach of creditors and therefore if possible a debtor should not borrow from their pension prior to filing for bankruptcy.
Additionally, if a person borrows money from a pension (prior to the age requiring a mandatory withdrawal from the pension plan) they will have to report that money as additional income and pay a 10% excise tax on those monies.
Anyone with questions regarding personal bankruptcy should contact Jim Shenwick at jshenwick@gmail.com
Thursday, October 17, 2019
How New York’s Taxi Titans Roiled Cities Hundreds of Miles Away from New York TImes October 7, 2019
How New York’s Taxi Titans Roiled Cities Hundreds of Miles Away
In the early 2000s, a group of New Yorkers did something unexpected.
They bought a bunch of taxi medallions that allowed them to own and operate vehicles hundreds of miles away, in Chicago. Medallions in that city were considered such an inexpensive commodity that Chicago had, at times, given them away free.
This turned out to be an early sign of a takeover of taxi markets across the country by some New Yorkers who were about to teach drivers in other cities a painful lesson.
The real taxi money wasn’t made by charging passengers; it was made by raising the price of medallions and financing loans to drivers who wanted to buy them.
The scheme started in New York.
In May, The Times’s Brian M. Rosenthal exposed the financial maneuvers that helped lead to the collapse of the taxi industry in New York City.
His series detailed potential market manipulation of taxi medallion prices and showed how some of the people who manipulated those prices also made money by providing drivers with high loan amounts, long loan lengths, steep fees and interest-only terms.
The Department of Justice and the New York attorney general soon opened investigations into the industry. The city arrested a debt collector, waived $10 million in fees owed by medallion owners and strengthened regulations.
The taxi titans expanded their operations to Chicago …
Symon Garber, a New York fleet owner, along with a group of partners, began buying medallions in Chicago and lending to other buyers. They eventually bought 800 of the city’s 7,000 medallions.
Michael Levine, a legend in New York’s taxi industry, bought more than 500 medallions in Chicago. Mr. Levine also was involved in a company that provided at least 750 loans to medallion owners.
At least 40 other New Yorkers bought Chicago medallions, including Michael Cohen, President Trump’s former lawyer, records show.
… and to Boston, Philadelphia and elsewhere.
Then some of the same people who roiled New York’s industry expanded their operations. Medallion prices soared to $700,000 in Boston, $550,000 in Philadelphia, $400,000 in Miami and $250,000 in San Francisco.
But in Chicago, New Yorkers eventually bought almost half of that city’s medallions, records showed. The average cost of a medallion there — less than $50,000 in 2006 — rose to nearly $400,000 before prices began plummeting in 2013.
Today, a Chicago taxi medallion is worth $30,000 or less.
“In retrospect, it should’ve set off alarm bells” that New Yorkers were entering Chicago’s market,” said Michael Negron, who was a policy adviser to Rahm Emanuel, a former Chicago mayor. “Outside investors were coming in to upend the industry, and everybody kind of missed it.”
The New Yorkers who bought medallions in Chicago and elsewhere said in interviews with Mr. Rosenthal that they were never accused of breaking any laws. They said that as New York medallion prices rose, it made sense to pursue new opportunities.
In the early 2000s, a group of New Yorkers did something unexpected.
They bought a bunch of taxi medallions that allowed them to own and operate vehicles hundreds of miles away, in Chicago. Medallions in that city were considered such an inexpensive commodity that Chicago had, at times, given them away free.
This turned out to be an early sign of a takeover of taxi markets across the country by some New Yorkers who were about to teach drivers in other cities a painful lesson.
The real taxi money wasn’t made by charging passengers; it was made by raising the price of medallions and financing loans to drivers who wanted to buy them.
The scheme started in New York.
In May, The Times’s Brian M. Rosenthal exposed the financial maneuvers that helped lead to the collapse of the taxi industry in New York City.
His series detailed potential market manipulation of taxi medallion prices and showed how some of the people who manipulated those prices also made money by providing drivers with high loan amounts, long loan lengths, steep fees and interest-only terms.
The Department of Justice and the New York attorney general soon opened investigations into the industry. The city arrested a debt collector, waived $10 million in fees owed by medallion owners and strengthened regulations.
The taxi titans expanded their operations to Chicago …
Symon Garber, a New York fleet owner, along with a group of partners, began buying medallions in Chicago and lending to other buyers. They eventually bought 800 of the city’s 7,000 medallions.
Michael Levine, a legend in New York’s taxi industry, bought more than 500 medallions in Chicago. Mr. Levine also was involved in a company that provided at least 750 loans to medallion owners.
At least 40 other New Yorkers bought Chicago medallions, including Michael Cohen, President Trump’s former lawyer, records show.
… and to Boston, Philadelphia and elsewhere.
Then some of the same people who roiled New York’s industry expanded their operations. Medallion prices soared to $700,000 in Boston, $550,000 in Philadelphia, $400,000 in Miami and $250,000 in San Francisco.
But in Chicago, New Yorkers eventually bought almost half of that city’s medallions, records showed. The average cost of a medallion there — less than $50,000 in 2006 — rose to nearly $400,000 before prices began plummeting in 2013.
Today, a Chicago taxi medallion is worth $30,000 or less.
“In retrospect, it should’ve set off alarm bells” that New Yorkers were entering Chicago’s market,” said Michael Negron, who was a policy adviser to Rahm Emanuel, a former Chicago mayor. “Outside investors were coming in to upend the industry, and everybody kind of missed it.”
The New Yorkers who bought medallions in Chicago and elsewhere said in interviews with Mr. Rosenthal that they were never accused of breaking any laws. They said that as New York medallion prices rose, it made sense to pursue new opportunities.
Pensions and Chapter 7 Bankruptcy filings
Pensions and Chapter 7 Bankruptcy filings
With the increase in bankruptcy filings, many clients have contacted us regarding the treatment of their pensions in a chapter 7 bankruptcy filing and whether they should borrow money from their pension prior to filing for bankruptcy.
Under the law in New York both Roth and traditional IRA’s are exempt up to $1,283,025 in a chapter 7 bankruptcy filing.
401(k)s, 403(b)s, profit sharing plans, SEP & Defined Benefit Plans are completely exempt in a chapter 7 bankruptcy.
Pension monies are also exempt from the reach of creditors (“spendthrift trust”) so they cannot be liened or levied by creditors. If those monies are withdrawn from a pension plan they are subject to the reach of creditors and therefore if possible a debtor should not borrow from their pension prior to filing for bankruptcy.
Additionally, if a person borrows money from a pension (prior to the age requiring a mandatory withdrawal from the pension plan) they will have to report that money as additional income and pay a 10% excise tax on those monies.
Anyone with questions regarding personal bankruptcy should contact Jim Shenwick at jshenwick@gmail.com
jshenwick@gmail.com • Shenwick & Associates
With the increase in bankruptcy filings, many clients have contacted us regarding the treatment of their pensions in a chapter 7 bankruptcy filing and whether they should borrow money from their pension prior to filing for bankruptcy.
Under the law in New York both Roth and traditional IRA’s are exempt up to $1,283,025 in a chapter 7 bankruptcy filing.
401(k)s, 403(b)s, profit sharing plans, SEP & Defined Benefit Plans are completely exempt in a chapter 7 bankruptcy.
Pension monies are also exempt from the reach of creditors (“spendthrift trust”) so they cannot be liened or levied by creditors. If those monies are withdrawn from a pension plan they are subject to the reach of creditors and therefore if possible a debtor should not borrow from their pension prior to filing for bankruptcy.
Additionally, if a person borrows money from a pension (prior to the age requiring a mandatory withdrawal from the pension plan) they will have to report that money as additional income and pay a 10% excise tax on those monies.
Anyone with questions regarding personal bankruptcy should contact Jim Shenwick at jshenwick@gmail.com
jshenwick@gmail.com • Shenwick & Associates
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